Rate Freeze Seen Entering 4th Year as Canada Misses U.S. Rebound
The Bank of Canada will probably begin a fourth year with a 1 percent policy interest rate as the U.S. rebound fails to spark the exports and investment Governor Stephen Poloz says are needed to revive the world’s 11th largest economy.
Growth slowed in the April-June period, Statistics Canada reported last week, with business investment declining for a second straight quarter. While the U.S. Federal Reserve is considering tapering its asset purchases, Canada’s central bank won’t change its policy because the economy is forecast to remain below full output and inflation to stay below the bank’s 2 percent target until 2015.
The bank will announce a 1 percent benchmark rate for a 24th straight time in a decision due at 10:00 a.m. in Ottawa, according to all 22 economists surveyed by Bloomberg News. Business spending has been sluggish since former Governor Mark Carney tightened policy three times in 2010, and companies are holding back even as Europe comes out of recession and U.S. growth exceeds Canada’s.
At their last announcement, policy makers led by Poloz said current policy will remain appropriate “as long as there is significant slack in the Canadian economy, the inflation outlook remains muted,” and consumers continue to show signs of moderating their record debts. A “normalization” of borrowing costs can be expected as the economy improves “over time,” the central bank said.
The bank will be on hold until the last quarter of next year, according to the median forecast in a separate Bloomberg survey last month.
Before the bank tightens, “inflation has to pick up and the output gap has to start closing,” said Benjamin Reitzes, a senior economist at BMO Capital Markets in Toronto. The possibility of Fed tapering “is definitely not the only thing,” Canadian policy makers will consider, he said.
Consumer prices advanced 1.3 percent in July, the 15th straight month the rate was slower than the bank’s target, and policy makers have said growth will be “choppy” in coming months after flooding in oil-rich Alberta and a construction strike in Quebec in June.
Output growth slowed to a 1.7 percent annualized pace in the second quarter, including a monthly decline of 0.5 percent in June that was the biggest since a 2009 recession. That suggests third-quarter growth may fall short of the central bank’s 3.8 percent forecast, economists said.
“There are still risks out there to global growth that present risks to Canada,” said Craig Wright, chief economist at Toronto-based Royal Bank of Canada, the country’s biggest bank by assets. “It’s been remarkable how long it’s taken to turn around” business investment, he said.
Teck Resources Ltd. (TCK/B), Canada’s second-largest mining company, said in July it would delay a copper project in Chile and the start of production at a coal mine in British Columbia after a decline in commodity prices.
The central bank’s last quarterly business survey showed 35 percent of executives planned more spending on machinery and equipment while 26 percent were cutting back. It was the third lowest balance of opinion since the country exited recession in 2009.
The Federal Reserve will begin to slow its bond purchases at its Sept. 17-18 meeting, according to 65 percent of economists surveyed by Bloomberg News last month. Canada will benefit as tapering begins because that means the U.S., which buys three-quarters of Canada’s exports, is recovering, Deputy Governor John Murray said in a speech last week. Slower purchases may also weaken the Canadian dollar, supporting exports, Murray said.
Those forces won’t lead to a quick recovery or interest-rate increase in Canada, said Reitzes at BMO Capital Markets. “The Fed has to finish tapering before the Bank of Canada even considers rate hikes,” he said.
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